HBOS in talks to sell its Australian bank

Mortgage bank HBOS finally has some good news, but this has done little for its shares as an early attempt at a market rally peters out.

Investors have spend weeks worrying about the state of banks' finances, and more specifically for HBOS, whether the proposed bid from Lloyds TSB will actually go ahead.

Today came signs HBOS might receive a boost to its balance sheet.

Commonwealth Bank of Australia has said it has started exclusive talks about buying HBOS's business down under, BankWest. The deal could be worth A$2bn (£850m) The disposal of the bank is part of HBOS's attempts to bolster its finances, and investors had feared the current crisis and liquidity crunch might make it difficult to find suitable buyers. Indeed National Australia Bank was said to be interested in BankWest at one point before the proposal came to nothing.

But with the banking sector still under pressure on fears about the financial future, an opening rise in HBOS shares has gone into reverse. They now stand 9.8p lower at 151p, despite a buy note from Alex Potter at Collins Stewart.

He said: "This price [for BankWest] is significantly less than the £3bn we had initially hoped for but we would still take the sale positively

"In a banking market where short-term funding is absolutely critical, the short-term funding benefit of this deal should be highly-valued and gives a hint as to why HBOS are reportedly negotiating at such a depressed price level. [The deal] would leave HBOS's funding gap at £89bn and, importantly, improves the short-term pool of liquidity within the bank, we believe.

"We have to assume that the UK financial system will not melt down and that a recovery will emerge in due course. In this instance, HBOS is moving to improve its lot and the better funding and short-term liquidity position this deal would bring are key in this volatile market. HBOS is at a 25% discount to the Lloyds TSB bid, in large part due to the absence of merger arbitrage activity, we feel. We view this as an opportunity and reiterate our buy call on HBOS."

Lloyds has edged down 2p to 257p, but other banks are being hit harder.

Royal Bank of Scotland is again slumping, down another 30% to just 103.6p on talk of possible government funding. KBW analysts also cut their price target on RBS from 260p to 230p, saying: "Risks to our target price include a sustained downturn in the UK/US/Irish economies which would likely lead to lower growth and higher impairment estimates. Additionally, the ABN Amro acquisition brings with it integration risk, which could lead to operational difficulties."

Meanwhile Barclays is down 17p at 297p.

Overall, with the market struggling to stay in positive territory after yesterday's record breaking decline, it looks like another volatile day in prospect. After touching 4722, the FTSE 100 is now at 46208.2, up just 19 points.

Miners have recovered a little ground, with BHP Billiton 38p better at £11.88 and Xstrata up 49p at £14.06.

But Marks & Spencer lost 1.5p at 226.5p after Sir Philip Green's Bhs reported a 40% decline in full-year profit.